Excessive Dollar Debt: Financial Development and Underinsurance

We propose that the limited financial development of emerging markets is a significant factor behind the large share of dollar-denominated external debt present in these markets. We show that when financial constraints affect borrowing and lending between domestic agents, agents undervalue insuring against an exchange rate depreciation. Since more of this insurance is present when external debt is denominated in domestic currency rather than in dollars, this result implies that domestic agents choose excessive dollar debt. We also show that limited financial development reduces the incentives for foreign lenders to enter emerging markets. The retarded entry reinforces the underinsurance problem.     

Notes

Editor's Note: Starting with this issue, the Journal will include a new section to accommodate a growing prevalance of shorter articles with single-issue orientation.     

Innovations in Retail Business Models

A retail business model articulates how a retailer creates value for its customers and appropriates value from the markets. Innovations in business models are increasingly critical for building sustainable advantage in a marketplace defined by unrelenting change, escalating customer expectations, and intense competition. Drawing from extant strategy and retailing research, we propose that innovations in retail business models are best viewed as changes in three design components: (1) the way in which the activities are organized, (2) the type of activities that are executed, and (3) the level of participation of the actors engaged in performing those activities. We propose six major ways in which retailers could innovate their business models to enhance value creation and appropriation beyond the levels afforded by traditional approaches to retailing. We also describe the drivers of business model innovations, the potential consequences of such innovations, and numerous examples from retail practice that highlight our concepts and arguments. In doing so, we provide a starting point for academic research in a domain that is deficient in theoretical and empirical research, and offer retailing managers a framework to guide retail business model innovations for sustainable competitive advantage.     

Currency Undervaluation and Sovereign Wealth Funds: A New Role for the World Trade Organization

Two aspects of global imbalances – undervalued exchange rates and sovereign wealth funds – require a multilateral response. For reasons of inadequate leverage and eroding legitimacy, the International Monetary Fund has not been effective in dealing with undervalued exchange rates. This paper proposes new rules in the World Trade Organization to discipline cases of significant undervaluation that are clearly attributable to government action. The rationale for WTO involvement is that there are large trade consequences of undervalued exchange rates, which act as both import tariffs and export subsidies, and that the WTO's enforcement mechanism is credible and effective. The World Trade Organization would not be involved in exchange rate management, and would not displace the International Monetary Fund. Rather, the authors suggest ways to harness the comparative advantage of the two institutions, with the International Monetary Fund providing the essential technical expertise in the World Trade Organization's enforcement process. There is a bargain to be struck between countries with sovereign wealth funds, which want secure and liberal access for their capital, and capital‐importing countries, which have concerns about the objectives and operations of sovereign wealth funds. The World Trade Organization is the natural place to strike this bargain. Its General Agreement on Trade in Services already covers investments by sovereign wealth funds, and other agreements offer a precedent for designing disciplines for these funds. Placing exchange rates and sovereign wealth funds on the trade negotiating agenda may help revive the Doha Round by rekindling the interest of a wide variety of groups.     

Some Surprising Facts About the Concentration of Trade Across Commodities and Trading Partners

The present paper documents unexplained concentration in trade. Bernard et al. (Producer Dynamics: New Evidence from Micro Data, 2009, University of Chicago Press) have documented concentration at the level of the firm and in exports. Taking a step forward, we document trade volume concentration at the level of nations and in both exports and imports. Firm level concentration has been relatively easy to explain in terms of models of heterogeneous‐firm models with entry costs in both the domestic and foreign markets. But as we shall see, the concentration at the level of the nation, especially in imports if not exports, turns out to be far more difficult to explain.     

Variable returns to scale in general equilibrium theory once again

This paper relaxes some assumptions made by Jones (1968) and reconsiders the implications of variable returns to scale (VRS) for the Stolper-Samuelson and Rybczynski theorems. It also analyses for the first time the relationship between factor-returns and factor-supplies at constant commodity-prices. It is shown that the validity of the Rybczynski and/or Stolper-Samuelson theorem is neither necessary nor sufficient for the production possibilities frontier to be locally strictly concave to the origin. Several other new results are derived and an attempt is made to give an intuitive explanation of the most important findings.     

Is there a liability of foreignness in global banking? An empirical test of banks' X‐efficiency

When a company operates outside of its home country, it may suffer a ‘liability of foreignness.’ Does this a priori theoretical expectation hold in the global banking industry? Banks increasingly compete outside of their home countries, and operating environments often differ sharply across countries, both in terms of financial markets and credit risk. In this paper, we report the results of an empirical test of the liability of foreignness in the global banking industry, using Fitch–IBCA BankScope data for the period 1989–96. Our findings strongly support the liability of foreignness hypothesis. Further, the data show some evidence that the X‐efficiency of a foreign‐owned bank is strongly influenced by the competitiveness of its home country and the host country in which it operates. Lastly, we find that in some environments U.S.‐owned banks are more X‐efficient than other foreign‐owned banks in some environments, but less X‐efficient in others. Copyright © 2002 John Wiley & Sons, Ltd.     

Agricultural Liberalisation and the Least Developed Countries: Six Fallacies

Today, agriculture remains the most distorted sector of the world economy. Therefore, agricultural liberalisation in the Doha negotiations is rightly the top priority. But the public‐policy discourse on the subject remains fogged by a number of fallacies. These fallacies probably originated with the leadership of the World Bank but have now been embraced by the IMF, OECD, Oxfam and the leading academic critics of globalisation. The paper identifies six fallacies and offers evidence and analysis to debunk them: (1) Agricultural border protection and subsidies are largely a developed‐country phenomenon. (2) Developed‐country agricultural subsidies and protection hurt the poorest developing countries most. (3) Developed‐country subsidies and protection hurt the poor, rural households in the poorest countries. (4) Developed‐country agricultural protection and subsidies constitute the principal barrier to the development of the poorest developing countries. (5) Agricultural protection reflects double standard and hypocrisy on the part of the developed countries. (6) What the donor countries give with one hand (aid), they take away with the other (farm subsidies).     

From Fatwallet to eBay: An investigation of online deal-forums and sales promotions

Sales promotions are an important part of retail advertising strategy. Traditionally, research on sales promotions has generally assumed that the buyers are end consumers who do not engage in reselling, in large part due to high transaction costs. However, the recent Internet related technologies have dramatically lowered the cost of transferring goods between consumers, leading to relative ease of reselling activity amongst individual consumers. Little is known about the impact of this phenomenon on retailer's sales promotion strategy. In this research we investigate the reselling activity in online auctions for products that active deal seekers can obtain at deeply discounted prices from retailers. We further investigate the role of deal-forums in the resale process. Data is collected from an online deal-forum (http://www.fatwallet.com/) and eBay to test various reselling-related hypotheses. The results show that there is a significant abnormal increase in the number of newly posted auctions of a product after the deal information of this product is posted on deal-forum website. We also find that there is a significant price incentive for individuals to resell. The implications for sales promotion research and practice are discussed.